Sterling

• GBP/USD climbs back up from 1.2040 to 1.2175, testing its 100-hour moving average once more as traders digest the BOE decision.

• The BOE may be taking a more gradual approach for the time being, but money market bets on a more aggressive push by the central bank are not abating.

• With only four policy meetings remaining this year, traders are increasing their bets that the BOE will raise interest rates to 3% by the end of the year. To put it another way, that’s at least seven 25 basis point rate increases.

• This alludes to traders expecting a more aggressive BOE in September and October, i.e. at least 50 basis point rate hikes in both meetings.

• The pricing is causing a bit of a reversal in the pound, with cable recovering to test its 100-hour moving average (red line) at 1.2160 on the day.

• As much as the BOE appears to be pushing through in its battle against inflation, they haven’t provided much in terms of their pain threshold when tightening policy into a likely recession.

ECB

Policymakers at the European Central Bank have stated that they want a new policy instrument ready by the July meeting.

ECB sources reach the wires Policymakers at the European Central Bank are concerned that market stress will impede monetary policy.

Would like the new instrument to be ready for the July meeting. The new instrument is likely to offset bond purchases.

Bloomberg adds that the tool would most likely involve “selling other securities” so that purchases do not conflict with their efforts to tighten policy. In essence, this is QE, but not exactly QE in some convoluted way.

However, keep in mind that just because the ECB ‘wants’ the new instrument to be ready in the next few weeks doesn’t mean it will be.

BOE

The BOE announces its latest monetary policy decision on June 16, 2022, raising the bank rate by 25 basis points from 1.00 percent to 1.25 percent.

Bank rate vote 9-0* vs. expected

CPI inflation is expected to exceed 9% in the coming months

CPI inflation is expected to rise to slightly more than 11% in October The BOE will take the necessary steps to sustainably return inflation to the 2% target in the medium term.

The scale, pace, and timing of any further rate hikes will reflect the assessment of the economic outlook and inflationary pressures.

The BOE will be especially alert to indications of more persistent inflationary pressures.

The pound has dropped as a result of the decision, with cable falling from 1.2150 to 1.2060 after the BOE delivered a relatively straightforward decision.

The central bank is sticking to a more gradual approach in line with economic considerations, but it won’t do much to dispel the narrative that inflation in the UK is set to hit double digits and the cost-of-living crisis will worsen in the coming months.

 Treasury yields

• Treasury yields recover from the post-FOMC drop
• 10-year yields are up 12 basis points to 3.44 percent currently Thursday is a turnaround day, with markets shifting back in the opposite direction following the Fed’s decision yesterday.

• There was a lot of anxiety in the run-up to the FOMC meeting, so it appears that markets were just relieved to get over the hump. However, as we have more time to digest things, we are starting to see some nerves build up again, as there is little to suggest a change in the Fed’s outlook.

• The dollar is rising as yields rise, while equities are falling, with the mood exacerbated by the SNB’s surprise policy reversal in European morning trade today. US 2-year yields are currently up 15 basis points to 3.37 percent.

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